A question that we have been asked when active investors look to trade intra-day on leveraged ETFs, is how much does the overnight price movement matter to the return at the end of the day? Does the price trend continue, reverse, or random walk once markets are in the trading session? Is there a persistent trend that active investors should consider?
Of course, each day is different, and the overnight activity can be benign or quite impactful depending on market events, geopolitical news, and overnight tweets. We decided to look at the NASDAQ-100 Index year to date as of June 16, comparing the overnight return (measured from previous close to market open) to the trading hours return (measured from market open to market close).
What did we see? Looking at all trading days so far this year, we found a slightly negative correlation at -11.6%. At close to zero correlation, there is no appreciable dependency, either positive or negative, and means that markets are generally efficient so that news is absorbed into the index returns and doesn’t carry any appreciable momentum forward.
We can take a closer look at more volatile days, filtering for overnight moves greater than +2% or less than -2%. While there are less instances, we see the correlation move to -35.0%. While still not significant, this could mean from time to time we see immediate overreactions to news, with some level of reversal during the trading hours.
We can also review positive and negative overnight sessions, defined as greater than +1% return or less than -1% return. Negative sessions have low correlation at 14.9%, while positive sessions have marginally significant correlation at -57.4%. Still not enough to draw performance trends.
Overall, the lack of correlation between the overnight trading session and the day trading session tells us that markets are highly efficient and follow a random walk. Positioning in front of news and events or based on your own views instead of chasing short-term momentum remains a potentially effective strategy.
LongPoint ETFs offers Canadian domiciled ETFs traded in Canadian dollars on the TSX including leveraged and inverse ETFs under Savvy (2X) and Mega (3X) branding.
The ETFs are highly speculative and use a significant amount of leverage which magnifies gains and losses. The ETFs are intended for use in daily or short-term trading strategies by very knowledgeable, sophisticated investors. For example, you could lose your entire investment in one day if the underlying index of the ETF experiences a single-day price movement that is greater than 33% for the Mega ETFs and 50% for the Savvy ETFs. In addition, if you hold the ETFs for more than one day, your return could vary considerably from the ETF's daily target return. The negative effect of compounding on returns is more pronounced when combined with leverage and daily rebalancing in volatile markets. The ETFs are not suitable for investors who do not intend to actively monitor and manage their investments.
Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. LongPoint funds are managed by LongPoint ETFs and are available across Canada through registered dealers.
This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Investors should consult a financial and/or tax advisor for financial and/or tax information applicable to their specific situation.